A Masquerade of Fraud

According to ACI Worldwide, 50% of bust-out merchant fraud cases go unnoticed. Bust-out merchant fraudsters rack up high volumes of illegal transactions and then disappear, leaving others responsible for the subsequent chargebacks. As in a masquerade ball, fraudsters are able to go unnoticed, appearing to blend in as good merchants. Since different types of bust-out merchant fraud takes advantage of different aspects in the payments processing cycle, knowing the different types of merchant bust-out fraud can help lower the rate of undetected cases.

6 Types of Bust-Out Merchant Fraud

1. Stolen Card Data
One of the most common fraud cases we hear of is stolen card data. Fraudsters use stolen consumer data to rack up transactions and then simply disappear. By the time the chargebacks start rolling in, the bust-out merchants have closed up and moved on, leaving banks responsible for all the chargebacks.

2. False Identities Another popular method is creating false identities to open up lines of credit. Once these identities are created, they use those cards for the transactions.

3. Consumer Collusion
More and more, we see fraudsters and consumers partnering up to accomplish bust-out merchant fraud. In this method, consumers freely agree to give the fraudsters their credit card information to use for the transactions. In return, they receive a profit as well as later denying the charges to their issuing banks.

4. Fake Online Stores
There is a high-risk of stores setting up online profiles, which appear legitimate, having customers place orders, and then never sending anything. Risky merchants in this category include furniture, travel and event/concert ticket sellers. Due to the time delay between date of purchase and expected delivery date, fraudsters have time to process high numbers of transactions and disappear before complaints and chargebacks are even sent.

5. Empty Storefronts
Similar principal to fake online stores, but this occurs at brick and mortar locations. Bust-out merchants lease a storefront for a short period of time, getting a terminal from an acquirer and running what appear to be legitimate transactions. And then, out of nowhere disappear with the money.

6. Sleeper Bust-Out Merchants
Sleeper bust-out merchants are perhaps one of the sneakiest. These merchants will process normal transactions for long periods of time – months and sometimes even years – they wait until they have built a good reputation, and then out of nowhere strike.

In the end, no matter what type of bust-out merchant you encounter, the same principle drives them all: bust-out merchants set up what appear to be legitimate businesses and commit card fraud. But this fraud can be prevented. By having the proper due diligence in place, regularly monitoring your merchants, and sharing knowledge within the payment system, fraudsters have a harder time taking advantage of consumers and getting away with fraud.